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A New Era for U.S. Financial Market Regulation

April 22, 2013

By Kevin Rowe MPP 2014

While derivatives such as swaps and futures are essential tools for firms in managing risk, without proper regulation these instruments can quickly sow havoc across the economy. That was the message delivered last Tuesday (April 16th) by Gary Gensler, the Chairman of the Commodity Futures Trading Commission (CFTC), during the Regulatory Policy Seminar.

Gensler focused his remarks on the new era of financial market regulation following the 2008 financial crisis. Gensler described the progress Congress and the Obama Administration have made in ensuring that derivative markets are more transparent and less vulnerable to manipulation and fraud. He also highlighted the challenges of regulating an industry that is bigger, faster, and more global than ever before.

The CFTC has regulated futures contracts since 1936 and, under the Dodd-Frank financial regulation reform law of 2010, its mandate expanded to cover swaps regulation. Since Dodd-Frank, the CFTC has promulgated more than 40 new rules, including requiring central clearing of swaps transactions, which reduces the risk of cascading defaults across firms.

While Gensler argued that the reforms make CFTC a better regulator, he also acknowledged the challenges for his organization of just 700 staff in overseeing the fast-growing derivatives markets. While the CFTC’s budget has been flat over the past two decades, the derivatives market has grown eight times larger—a task Gensler compared to expanding the number of teams and games in the National Football League eight fold, without increasing the number of referees.